Utility regulators are considering loosening strict investment restrictions on money set aside for the eventual dismantling of California’s two nuclear plants.

The investments review is an unusual addition to the routine examination of trust balances and contributions conducted every three years by the California Public Utilities Commission.

Unprecedented equipment failures at the idled San Onofre nuclear plant have raised the prospect that its multibillion-dollar decommissioning trusts may need to be tapped sooner than anticipated.

Yet owners of the plant — San Diego Gas & Electric and Southern California Edison — say they would still take advantage of changes that could include investments in derivatives, high-yield bonds and hedge funds.

The San Onofre and Diablo Canyon plants, like most U.S. nuclear facilities, accumulate decommissioning funds over their operating life to cope with the decades-long process of removing reactors and reducing residual radioactivity under federal oversight.

California Public Utilities Commissioner Timothy Simon, a veteran of the financial services industry, ordered the first examination since the early 1990s of investment ground rules for the nuclear trusts. Under consideration are new assets that can yield higher returns but are typically accompanied by higher professional fees and greater risk.

Edison has estimated that decommissioning San Onofre Units 2 and 3 when licenses expire in 2022 could cost $3.7 billion.

Current balances totaling $3.1 billion exceed federal regulatory requirements and are expected to be sufficient without the proposed alternate investments at current contribution rates, according to Edison and SDG&E.

Annual contributions to the trusts are $24 million for Edison customers and $8 million for customers of San Diego Gas & Electric.

“To the extent that the fund return improves, the less revenue is required from ratepayers to keep up with expected costs,” Public Utilities Commission spokesman Christopher Chow explained.

Simon and his staff declined to be interviewed.

Reason for timing unknown

Why the investments review is taking place now is unclear.

The commissioner initiated the investment-rules review before the outage at San Onofre. In August, Simon directed utilities to update their testimony in light of not only San Onofre but also a recent freeze on extending plant licenses by the Nuclear Regulatory Commission.

Relicensing could extend by 20 years the life of California’s nuclear plants — along with the investment horizon for decommissioning funds. A recent federal court ruling, however, has placed a priority on finding a solution to the on-site stockpiling of nuclear waste at plants across the country, including San Onofre.

Truman Burns, a supervisor at the utilities commission’s Division of Ratepayer Advocates, said the nuclear trusts would take on more risk to chase higher returns by shifting funds to lower-grade debt, hedge funds and other instruments that are currently off limits.

Current investments are a combination of mostly domestic stocks and investment-grade bonds.

“If you look at the utilities’ briefings, they admit that as you get closer to when you decommission, you want your investments in safer places like debt and corporate bonds,” Burns said. “You don’t want to have your trust’s corpus severely damaged just because the market tanks.”

Changes under consideration would allow investments for the first time in bonds that are rated below investment-grade, real estate, hedge funds and commodities, while raising limits on international equities. Limitations on investment management fees would be relaxed or eliminated.

Focus questioned

Matthew Freedman, staff attorney at The Utility Reform Network consumer advocacy group, said that with trusts at healthy levels, the commission should be focused on how much customers continue to pay for the operation and upkeep of the idled San Onofre plant.

Those costs dwarf any potential savings from shifting investments, he said.

Edison alone bills its customers about $650 million a year to maintain and operate San Onofre. The utilities commission recently delayed consideration of suspending that rate base, possibly until November.

“What is really bizarre is that he (Simon) is discussing concerns about whether the (San Onofre) units are going to close down prematurely,” Freedman said. “And the solution may be for you to invest in riskier investments?”

The case for fewer investment restrictions was outlined in a study commissioned by Edison, SDG&E and Pacific Gas and Electric, owner of the Diablo Canyon nuclear plant in San Luis Obispo County.

“The current approach, whereby broad investment restrictions are imposed and then reviewed only on a periodic basis, puts the trusts at a disadvantage relative to other institutional investors and … increases the expected costs to the customers,” concluded San Francisco-based Callan Associates, which received $120,000 for the report.

Concerns denied

Callan Associates has decades of experience advising utilities on the management of nuclear decommissioning trusts, with Sempra Energy and PG&E among its repeat clients.

As a pension consultant for the city of San Diego, Callan paid a settlement of $4.5 million in 2006 while defending itself from accusations of faulty investment advice.

The city’s suit against Callan was filed amid industrywide concerns about so-called pay-to-play practices, in which pension consultants were paid by mutual funds and other investment managers. But under the settlement with Callan, the city agreed in writing that it had no proof of pay-to-play or other unfair business practices.

SDG&E said it had no current concerns about potential conflicts of interest concerning Callan and its recommendation to broaden investments and raise limits on management fees.

“SDG&E would be generally supportive of additional flexibility to invest the (nuclear) trust’s assets,” a company spokesperson said in an email.

San Onofre was shut down in January when operators traced a radiation leak to extensive damage among steam generator tubes that carry radioactive water. It’s not clear when either reactor may be back online, and the viability of the Unit 3 reactor is in question.